U.S. Energy Industry— Just Facts

Steve Ryzner

December 1, 2015

Clean, sustainable, renewable and smart are just some of the terms used to describe the technologies on which the United States energy future looks too. What is the current state of such efforts in the US? This discussion will provide a realistic overview of where these “renewable” technologies stand in 2011, and where they are headed, compared to oil, natural gas, coal, and nuclear sources of energy. Let’s start with electricity consumption, where smart grid (SG) has received lots of hype. The business case for SG exists regardless of the case for renewables, but not vice-versa, as was explained in the white paper “A Layman’s Guide to Approaching Smart Grid Initiatives,”. Updating the power infrastructure (switchgear for example) is required for most of the claimed SG benefits to be realized in the US. Some power infrastructure technology is already installed on a very small scale in the US. At a minimum hundreds of billions of dollars are required to make most of the US power infrastructure smart. However, so far the federal government’s subsidies have primarily focused on residential metering and not the power infrastructure.

In some areas of the US, SG leads renewables, while in other areas renewables lead SG. Renewables cannot be a meaningful part of a long-term solution without the ability to integrate their intermittent production to the grid.

With that in mind, transmission infrastructure is one obstacle to wind becoming a bigger part of future US generation. Similar to any coal or NG plant, renewable plants are not always an easy sell, as shown by the January 2011 license withdrawal for a 250 MW solar station in California due to environmental protests. The cost of electricity generation, whether via conventional or renewable means, is key. As with any physical asset, the two cost concerns are the capital and operating costs. (We are using US EIA cost data, as they are more objective than advocates of any technology, conventional or renewable.) According to EIA normalized (all costs included) data , solar is much more costly than conventional generation, while wind is slightly more expensive.

Both wind and solar require additional hardware (cost) to manage their connection to the grid, such as control for the intermittent generation and the quality (surges for example) of that generated power. So until the US has a plan and the funding for large-scale modernization of the power infrastructure, the potential impact of meaningful additional renewable generation will be limited by the capability to integrate it into the grid. As the above data shows, solar generates a fraction of 1% of electricity in the US. Solar advocates cite statistics that 250,000 people are employed by the solar industry in Germany. True, but Germans pay some of the highest electric rates in the world. In Italy, feed-in tariffs guarantee solar generators an above-market electricity rate for 20 years.

Again, the losers are Italian electricity users. However, as of Q1 2011, solar subsidies in Germany and Italy are being cut. In December 2010 France halted its solar feed-in tariffs and Spain eliminated the premium rate previously earned for photovoltaic electricity generation.

The implications for the US are clear. With massive deficits facing the federal and state governments, the pressure will be on legislators to at least reduce, if not eliminate, subsidies for newer technologies. A case in point is the Illinois governor’s recent veto of legislation that would have forced consumers to subsidize the construction of plants that manufacture synthetic natural gas from coal. The plants’ operation would have locked consumers into higher natural gas costs for 20 years and one of the two plants was in Chicago. One could get into a long debate on the merits of the proposed technology in those plants, and the politics involved in the case. Instead we focus on two key traits. Energy, no matter the type, is a commodity, and as such, cost is the most important factor. Also, it is hard to build power generation capacity (conventional or renewable) in a densely populated area.

Hydro generation has existed for decades, and already accounts for 70% of renewable generation, or 7% of total generation. It has none of the reliability drawbacks that wind and solar do, but significant further expansion is limited by geography, competing uses for the water, and environmental concerns. From a cost standpoint, hydro generation is one of the least costly methods to generate electricity, and these plants were already integrated into the grid many years ago.

Energy storage should be mentioned as well, as it allows one to store energy from a renewable source and release (sell) it into the grid when needed, essentially arbitrage. There are different storage technologies, battery and pumped hydro the most proven, but comparative cost is the key. The low cost of natural gas means that utilities can simply build natural gas peaking plants rather than use riskier techniques such as storage.

Biomass is another renewable, and is further divided into two types: wood (plant)-derived biomass and waste-derived biomass. There are many good reasons to use plants and garbage for energy (electricity generation or transportation use) when it can be done cost effectively. Cellulosic ethanol is an example of a plant-based biomass transportation fuel. However the US Congressional Budget Office stated that “current technologies for producing cellulosic ethanol are not commercially viable.” The bottom line is that biomass fuels have repeatedly proved very difficult to scale and have had a negative history of tax dollars being spent on development. Sometimes and unfortunately, facts alone cannot overcome politics. The current US mandate for corn-based ethanol in gasoline is a good example of a controversial policy. Thirty-nine percent of the US corn crop was devoted to ethanol in 2010. Even if 100% of the US corn crop was devoted to end use for gasoline it would only reduce US oil needs by 4%. However, a far cheaper biomass source (sugar from Brazil) has been blocked due to political reasons for years.

Turning now to conventional energy sources, the cost of NG generation depends mostly on the price of the underlying NG commodity. While no one can predict the future, supplies of natural gas (NG) are plentiful in North America and prices are in a multi-year downturn. The development of shale gas in the last several years has also impacted the price of NG. The concept of global warming (climate change) is controversial even among scientists, but if one believes in that theory, the case for NG gets even stronger. NG powered vehicles have been operated successfully for many years in bus and truck applications. With a supply of NG in the US for at least several decades, expanding this technology for consumers (to power cars) is being held back by two issues: safety and politics. Regardless of whether NG is used for transportation needs, its use for electricity generation is not constrained by supply.

Like NG, supplies of coal in North America are abundant. Compared to NG, the cost of coal generation has low volatility. With coal currently supplying 47% of US power generation needs, regulatory uncertainty is the big wild card for the future of coal in the US. It is easy to criticize coal, but you cannot eliminate 47% of current generation capacity without a reliable substitute.

Electric vehicles, whether with a gasoline back-up (hybrid), or full electric, reduce some need for oil. The key factor here is when the US market share of such electric vehicles becomes meaningful. Cost and convenience are key factors, and this includes costs for purchasing these vehicles as well as the cost for gasoline. Numerous factors suggest that mass-scale consumer adoption of electric vehicles is unrealistic. As reported by Bloomberg “The government is boosting investment in a technology that has failed to win broad acceptance after more than a decade in the marketplace. Consumer sales of hybrids are headed for their third consecutive yearly decline.” Politics aside, at some point fundamentals do matter. The aftermath of the 2008 financial meltdown effectively stopped projects for both conventional and renewable energy. Also, 2008 and 2009 were the first years since the 1990s that electricity demand fell year over year. So for either renewable or for conventional generation in the future, cost will be the key factor. Oil & NG production is predicted to be stable for the next 25 years, based on EIA forecasts. Before the Japan disaster in March 2011, the forecast from the EIA was that nuclear power by 2035 would grow in absolute terms but fall in percentage terms. It will be important to see how the Japan nuclear crisis impacts nuclear perception in the US, which had been on an upswing as a clean power resource.

Conclusion Numerous states have mandates (RPS) and incentives for generation via renewable sources, but such ad-hoc policies are not tied into a coherent strategy at the state or federal level. Much uncertainty exists from the lack of any federal energy policy in the US and such a policy is not likely to evolve before the 2012 election, at the earliest. Significant capital will continue to be spent on various renewable technologies. The EIA projects that renewable generated electricity will account for 17% of total U.S. electricity generation in 2035, up from 8% in 2008. That compares with a 10% renewables share in 2011, where 70% of that 10% renewables share is hydro. Given the earlier discussion, clearly the increase in renewables will not occur because there is necessarily an economic case to be made for each technology. Rather, the increase will occur because of state RPS mandates. Even if one doubts those EIA projections, it is unrealistic to expect that any of these technologies will have the macro-transformational effect that advocates routinely claim. The science, costs, politics and math simply do not work. At the same time, we should not abandon efforts to change our energy mix. But such efforts need to be based on the costs and practicality of such energy sources, rather than politics. That means NG and coal are most likely to increase in absolute terms by 2035, and nuclear is anyone’s guess at the moment but its future is not bright in the short term. Solar and biomass are likely to remain niches with low-single-digit market shares at best, and hydro and wind will be the only meaningful renewable sources. To learn more about smart grid, the energy industry, utilities, distributors and equipment manufacturers, contact Steve Ryzner at sryzner@saginllc.com